Datafin Revisited: Judicial Review During a Takeover Bid - PowerPoint Presentation

Slide1

Datafin Revisited: Judicial Review During a Takeover Bid

Professor

Blanaid

Clarke

McCann FitzGerald Chair of Corporate

Law

CELS

Lunchtime

Seminar, 4 November 2015Slide2

Datafin [1987] QB 815

Slide3

Plan

Datafin

(1987)

- Takeover

Regulation in UK

in 1980s

- The Court’s Non-interventionist Approach

Regulation

in UK

post

Datafin

Is

Datafin

still relevant?

Tactical Litigation in

Ireland

Implications

for

Datafin

and the DirectiveSlide4

Takeover Regulation Pre-Datafin

Takeover Panel established in 1968

City Code containing 38 Rules, Notes and 10 General Principles

Consensual approach to regulation with Code reflecting

the collective opinion of

professionals

in the field of takeovers

Code produced, administered and enforced by the Panel

“[The Rules} are to be interpreted to achieve their underlying purpose. Therefore, their spirit must be observed as well as their letter.” (Code, Introduction)System designed to provide speed, flexibility and certainty

- Self-Regulatory SystemSlide5

Datafin (Sir

John Donaldson MR

Judgment)

Counsel for the Panel set out “the disastrous consequences of the court having and exercising jurisdiction”

He referred to “the

awareness of the court of the

special needs of the financial markets for speed on the part of decision-makers

and for being able to

rely on those decision as a sure basis for dealing in the market.”“..A very special feature of public law decisions [is that] however wrong they may be, however lacking in jurisdiction they may be, they subsist and remain fully effective unless and until they are set aside by a court of competent jurisdiction... [This avoids applications being used] as a mere ploy in take-over battles”“the panel combines the functions of legislator, court interpreting the panel's legislation, consultant and court investigating and imposing penalties in respect of alleged breaches of the code.”Examines case for illegality, irrationality and procedural improprietySlide6

Datafin (Sir

John Donaldson MR

Judgment)

continued“When

it comes to interpreting its own rules, it must clearly be given considerable

latitude

both because,

as legislator

, it could properly alter them at any time and because of the form which the rules take, ie laying down principles to be applied in spirit as much as in letter in specific situations. Where there might be a legitimate cause for complaint and for the intervention of the court would be if the interpretation were so far removed from the natural and ordinary meaning of the words of the rules that an ordinary user of the market could reasonably be misled. Even then it by no means follows that the court would think it appropriate to quash an interpretative decision of the panel. It might well take the view that a more appropriate course would be to declare the true meaning of the rule, leaving it to the panel to promulgate a new rule accurately expressing its intentions.”Slide7

Datafin (Sir

John Donaldson MR

Judgment)

continued“in

the light of the

special nature of the panel

, its

functions

, the market in which it is operating, the time scales which are inherent in that market and the need to safeguard the position of third parties …all of whom are entitled to continue to trade on an assumption of the validity of the panel's rules and decisions, unless and until they are quashed by the court, I should expect the relationship between the panel and the court to be historic rather than contemporaneous. I should expect the court to allow contemporary decisions to take their course, considering the complaint and intervening, if at all, later and in retrospect by declaratory orders which would enable the panel not to repeat any error and would relieve individuals of the disciplinary consequences of any erroneous finding of breach of the rules. Slide8

Takeovers Directive 2004/25

Framework Directive setting out minimum standards

Many features modelled on the City

Code e.g. mandatory bid, prohibition on frustrating action

6 General Principles

Specific Rules

eg

mandatory Bid, squeeze-out and sell out rules, employee information

Waivers and Derogations once the General Principles are respected“There may be some potential for increased tactical litigation as a result of the new legal framework created by the Takeovers Directive.” – DTI Consultation, 2005Slide9

Takeovers Directive 2004/25 (continued)

T

he

“Directive shall not affect the power which courts may have in a Member State to decline to hear legal proceedings

and to decide whether or not such proceedings affect

the outcome

of a bid. This Directive shall not affect the power of the

Member States

to determine the legal position concerning the liability of supervisory authorities or concerning litigation between the parties to a bid.” - Article 4.6 A bespoke judicial mechanism was considered unnecessary by the DTI because “the Takeover Panel framework has well established judicial systems that operate efficiently and fairly, and sufficiently clear guidance exists from the courts as to the extent to which they would intervene by way of judicial review of Takeover Panel decisions”.Attempts to minimise the risks associated with the possible increase in tactical litigation: Slide10

Post-Datafin Takeover Regulation

Human Rights Act

1998 led to separation of rule-making

and adjudicative functions

ie

Code Committee v Executive

, Hearings Committee and Takeover Appeal Board

The Panel is the Competent authority for the Directive

Numerous amendments made to the City Code eg 6 General PrinciplesRules in the Code have a statutory basis in Companies Act 2006 “It is intended that the implementing legislation should neither undermine nor be inconsistent with the principles established in the Datafin case.” DTI 2005Slide11

Provisions in 2006 Act “designed to avoid tactical litigation between parties to a

bid”

The Panel has power to make rules

(

s

943(3))

The Panel

may make rulings on the interpretation, application or effect of the rules (s 945(1

)) To the extent and in the circumstances specified in rules, and subject to any review or appeal, a ruling has binding effect s.945(2)Exclusion of New Rights of Action for Breach of Statutory Duty (s.956(1))Breach of Code does not make any transaction void or unenforceable (s.956(2))Slide12

Irish Takeover Regulation

The Irish Takeover Panel is a

statutory body

under the Irish Takeover Panel Act 1997 and the competent authority for the Directive

Regulates Irish registered companies listed in EU, Nasdaq and NY SE

Takeover Rules “modelled” on the City Code but legally binding

Rulings, Directions, Censures and Hearings

Judicial Review is the only manner of questioning the validity of a Rule or appealing a Panel ruling or direction

(s.13)7 days to seek leave to apply for judicial reviewSlide13

Tactical Litigation during Bid Irish Perspective

1. Involving the Panel

Datafin

not cited

(3 Cases)

2. Involving the Parties

Based on Application of the Code (

Elan 2013

) Based on other grounds (myriad) Distinguish Tactical v Non-Tactical (consequence v motive)Slide14

Royalty Pharma Bid For Elan (2013)

On a Bank holiday Monday, Elan “

received an interim injunction

restraining the offeror distributing a proxy statement filed in US on basis that it did not comply with the Irish Takeover Rules. “Elan

issued the injunction in aid of the Panel, to prevent RP from distributing the proxy statement until the Panel had considered the document.” (Elan statement)

Next day, the High Court,

Elan

did not seek a continuance:

As RP agreed in Court not to further disseminate its proxy statement until the Irish Takeover Panel has determined whether it complied with the Takeover Rules (per Elan)when it became apparent in the High Court that claims brought by Elan were either already being considered by the Panel or were matters that should first be brought to the Panel (RP statement)“Slide15

Relevant Principles of Statutory Interpretation

Onus on applicant to prove “

substantial grounds

” for contention that Ruling is invalid or should be quashed

Rules transposing an obligation imposed by the Directive must be

interpreted

,

so far as possible, to give effect to the aims and objectives of the Dire

ctive (ECJ in Marleasing)Irish Courts interpret their national law in light of “the wording and the purpose of the Directive in order to achieve the results envisaged by the Directive” (Ir S.Ct in Nathan v Bailey Gibson Ltd)When construing terms in a Directive, the domestic interpretation should be in line with the interpretation given in other Member States (ECJ in Adolf Truly GmbH)Recurring theme of ECJ decisions on the interpretation of directives is need for a teleological interpretation in accordance with and furthering the purpose and objects of the DirectiveSlide16

Curial Deference

Irish Courts have emphasised in case of statutory appeals the expertise and specialised knowledge of certain bodies under review and the lack of expertise of judges in such areas

(

S.Ct

in Orange v Director of Telecommunications Regulations

)

Where “significant error” of law, the court may quash the decision

(H.C in Cork

City Council v Shackleton)Slide17

1. Ryanair

bid for Aer Lingus (2009)

On a

Friday

, Ryanair sought leave to

apply for judicial review of

a Panel direction

the previous e

vening to both CEOs not to participate in a live televised debate.

Rule 19.6

required

parties to an offer to use all reasonable endeavours to ensure that new information is not released during an interview and that the sequencing of the interview does not lead to its becoming misleading or open to misinterpretation.

Note

on Rule 19.6

stated

that joint interviews and public confrontations between representatives of the offeror and the offeree, or between competing offerors, should be avoided.

(Similar to R.19.6 City Code)

Submissions due the following Wednesday

with case to be heard on the

Thursday

.

Application Withdrawn after Government on the Thursday refused to sell its stake and the Takeover Bid was WithdrawnSlide18

2. Royalty

Pharma

Bid for Elan (2013

)

In order to ensure compliance with General Principle 4, the Panel

refused to allow an offeror to

resile

from clear and express statements

that

the offer would lapse if offeree shareholders approved 4 resolutions proposed by its board?

General

Principle 4:

“

False markets must not be created

in the securities of the

offeree, of

the offeror or of any other company concerned by the offer in

such

a way that the rise or fall of the prices of the securities

becomes

artificial and the normal functioning of the markets is

distorted”(Art.3.1(d) of the Directive

)

Interlocutory injunction

(unopposed) granted

to prevent Panel issuing a direction that the bid should lapse until

the case was heard

Application

subsequently

withdrawn following lodgement by Panel of its Statement of Opposition

Slide19

3. Ryanair

/

Aer

Lingus (2013)

Aer Lingus Group PLC v Irish Takeover Panel [2013] IEHC 428

June 2012 – Ryanair announced a hostile

offer

July 2012 – Ryanair despatches offer document

August 29 2012 – Offer automatically lapsed when European Commission referred acquisition under Merger Regulation to Phase II August 29 2012- Ryanair announced it intended to rebid if the acquisition was cleared by the Commission. This caused a new offer period to commence under Takeover RulesFebruary 27 2013 – Commission announced the acquisition was prohibited causing the new offer period to end under Takeover RulesRule 35.1(a) Takeover Rules – if an offeror has announced “

a firm intention to make an offer” or has despatched an offer and the offer is withdrawn or lapsed, the offeror must delay 12 months from the withdrawal or

lapse

to make a new offer

+ 12 (per Panel)

+ 12 (per Aer Lingus)Slide20

Aer

Lingus

claims

AL sought inter alia an order of c

ertiorari

in respect of the ruling [and a declaration it was wrong in law and made

ultra vires

]

Telescoped hearing of application for leave to seek judicial review and judicial review itselfClaimed Panel was “wrong in law” to distinguish between a target subject to a possible bid and one subject to a firm intention to make an offer announcement

Claim that Panel misdirected itself in law as to the proper interpretation of a “firm intention to make an offer” under the Takeover Rules

Claim that Panel failed to have proper regard to and properly apply General Principle 6

“an offeree company must not be hindered in the conduct of its affairs for longer than is reasonable by a bid for its securities

”

(Article 3.1(f) of the Directive) Slide21

“Put up or Shut Up rule” is available

after announcement of a possible offer.

R.35.1 seeks to strike a balance between allowing shareholders consider a bid and enabling the offeree’s business to continue without distraction and uncertaintyRestrictions on frustrating action seek to protect shareholdersThe General Principles have the potential to conflict with one

another and no

General Principle transcends other General Principles in all circumstances

R.35.1

is

an amplification of General Principle (f) beyond its primary application which is to restrict the period of an offer’s currency.Reference was made to C-101/08 Audiolux SA and Others v Groupe Bruxelles Lambert SA (GBL) and Others where the ECJ described the General Principles as “only guiding principles” not general principles of law.Panel claimsSlide22

High Court Determination – Issue 1

“If a statutory body such as [the Panel] is shown to have made an error of law in the exercise of its functions and that has a significant impact on the interest of a concerned party, the court should generally be prepared to intervene….I am satisfied that…if I conclude that the Panel was wrong in its interpretation or construction of the rules…I should quash the decision.” per Ryan J.

AL

failed to satisfy the court that leave to apply for judicial review should be granted as it did not show that the Panel’s interpretation was wrong or even questionable.

AL

could have sought a derogation

Expression “announcement of a firm intention” has to be given a consistent meaning and thus it should be interpreted in R.35.1 as in R.2.5 as an “important and specific concept

”.Slide23

High Court Determination – Issue 2

AL confusing the restraints under which an

offeree

must operate with the relief that is afforded to a target under R.35.1

R.35.1 strikes a balance between the parties in a takeover transaction

General Principle(f) does not impose into R.35.1 a meaning that is contrary to its clear words

One cannot look to the Directive for guidance on the length of the moratorium or its starting point Slide24

Judicial Review Activity in 2013

“The Panel hopes that the recent High Court actions do not represent a trend towards a more litigious approach to takeovers in this jurisdiction. If parties do resort to the courts more frequently to resolve issues arising in connection with takeovers, such actions may introduce legal uncertainty into the takeover process and may run the risk of prolonging the bid timetable all of which is unlikely to be in the best interests of shareholders and the market in general. The Panel is an expert group with significant experience in applying its own rules and in dealing with issues arising during the course of a takeover. Since its establishment the Panel has sought to ensure that matters arising during the course of a takeover are dealt with expeditiously”

Chairman, Irish Takeover Panel , Annual Report, October 2013Slide25

Thank You